Abstract/Index

This paper studies the issue of the efficient taxation of capital income
in intertemporal optimizing models with infinite horizons and
endogenous population growth. We discover that, in the steady state,
the optimal capital income tax is negative when the economy is closed.
Instead, in a small open economy facing perfect capital mobility, the
Chamley-Judd result of a zero tax rate is obtained if capital taxation
is source-based; otherwise, income from wealth should be subsidized
if taxation is residence-based. Moreover, we find that in our setup,
taxing capital income with immediate expensing of capital expenditure
may replicate the first-best equilibrium when labor is subsidized.
Our findings, which depart substantially from those obtained in representative
agent models with an endogenous labor supply, are to be
ascribed to a wealth effect in the fertility choices that directly affects
the pseudo-welfare function of the social planner.